In his company’s 2014 outlook brochure, Old Mutual Global Investors chief executive Julian Ide made an unusual argument in favour of the firm’s staunchly active approach to fund management – price.
“It is my view that in the new world of transparency and clean pricing it will be increasingly difficult for passive funds to sell themselves on cost,” he wrote.
Speaking at a launch event Mr Ide went further, adding: “In a post-RDR world active management is not that different from passive in terms of price now and you get a performance premium.”
But even factoring in the so-called ‘superclean’ deals that are being struck between platforms and fund managers to bring active equity products below the 0.75 per cent ‘standard’ annual management charge (AMC), the gulf between the cheapest active and passive funds remains roughly 50 basis points (bps).
In some corners, cheaper forms of active management are gaining traction. Dimensional Fund Advisors has raised more than £4bn for its UK-based range of active funds in the past 10 years, while also managing to deliver competitive performance.
Dimensional’s seven funds aimed at UK investors have AMCs ranging between 25bps for its UK Core Equity and Global Short Dated Bond funds and 55bps for its Emerging Markets Core fund. For this price investors have been able to access funds that have invariably beaten their benchmarks over five years, according to FE Analytics data, using a ‘scientific’ process to construct large, diverse portfolios.
Following the introduction of the RDR the majority of fund managers honed in on a 75 basis point annual management charge as standard, stripping out trail commission and platform fees.
This standard fee for an actively-managed equity fund was challenged last year – and in all likelihood will continue to be in 2014 – by advisers and platforms. The argument from advisers was that the 75bps charge is in fact higher than previous bundled share classes as it does not factor in rebates that were previously agreed with some distributors. This led platforms to kick off the “superclean” movement which emerged in the second half of last year, whereby a small number of fund providers have agreed to lower their costs further for certain distributors.
Investec introduced share classes with AMCs of 65bps in September on a number of its funds, 10bps lower than the standard level for equity funds. Days later Standard Life, which has been at the forefront of campaigning for bespoke share classes, announced it had signed deals with 11 firms to bring down the total cost of ownership of funds when investors buy through its Wrap platform.
However, according to Standard Life at the time, the average discount achieved through this deal was a mere 9bps, roughly equivalent to the discount applied through rebates on bundled share classes.
Investors can therefore buy Alastair Mundy’s UK Special Situations fund – a long-term outperforming fund in the IMA UK All Companies sector – for 65bps through Standard Life. But, equally, those same investors can buy the Dimensional UK Core Equity fund for 25bps or Vanguard’s FTSE UK Equity Index fund for 15bps. Vanguard’s FTSE 100 exchange-traded fund offers access to the UK stock market for an AMC of just 0.1 per cent.
Mr Ide referred in his pricing argument to a ‘premium’ for active management, but can this be justified at as much as 50bps – or even more in many cases?
“We accept that in charging a premium for active management we need to deliver commensurate performance,” he says.
For some this is reasonable: in the above example, it can be argued that the Investec fund has justified its ‘premium’. In the three years to January 9 2014, the UK Special Situations fund gained 40.6 per cent, compared with 32 per cent from the Dimensional UK Core Equity fund and 28.1 per cent from the Vanguard FTSE UK Equity Index fund.
But it is hard to extrapolate this across the broader IMA UK All Companies sector. The number of UK funds highlighted in reports into underperforming products – Bestinvest’s Spot The Dog report, Chelsea Financial Services’ RedZone and Investment Adviser’s annual ‘red flag’ report – indicate that there are many products on the market which will not be able to justify their extra charges.
This point is backed up by Brian Dennehy, managing director of Kent-based adviser firm Dennehy Weller & Co, who argues that Mr Ide is coming at the fund cost issue from the wrong direction.
He says: “I think he is missing the point. Funds compete on performance after charges. The big swing factor isn’t charges – it is, by many multiples, performance.”
Nick Reeve is deputy news editor at Investment Adviser
